Broadly speaking, your investment choice should be guided by two things: investment horizon and risk appetite. Always remember, your short to medium-term goals should be funded by using safe or relatively safer debt investments. This is because you cannot afford to lose money when you don't have much time in hand. Always invest in bank deposits and liquid funds for goals that have to be met within a few months or in a year. Use bank deposits and short-term debt schemes to take care of the goals that have to be met over a horizon of at least one year or more. And for long-term goals, invest in equity. Long-term is five years or more.
Short-term investment options
Bank deposits: They are the safest and they also offer assured returns. However, the trouble with fixed deposits is that they earn low interest and that too is taxed on an ongoing basis. Use them only for keeping contingency funds, and money needed in the next few months to a year.
Company deposits: They offer slightly higher returns, but they are also a little more risky. Always stick to higher-rated deposits. Do not compromise on ratings for higher returns. Also, never put your entire investments in a single company, spread your investment across a few companies.
Debt schemes: They offer slightly superior returns over bank deposits. However, use them carefully. It is extremely important that your investment horizon should match with the fund. For example, use liquid funds to park money you have set aside to meet any emergency needs or any surplus money that you don't need for a few weeks up to a year. Short-duration funds are ideal to park money for investment horizons of one to three years.
Long-term investment options
Fixed income alternative: Many investors want some fixed-income allocation even in their long-term portfolio. For that, they can consider short-duration funds. Debt funds have favourable taxation over bank deposits if held for more than three years. If you sell a debt fund after three years, you have to pay a tax of 20 per cent post indexation, while the interest from deposits is taxed as per the marginal tax rate applicable to the individual.
Equity mutual funds: If you have an investment horizon of five years or longer, you should pick equity mutual fund schemes. If you are looking to save taxes under Section 80C of the Income Tax Act, pick one or two Equity Linked Savings Scheme (ELSS) or tax planning schemes. If you are a conservative investor new to the market, pick one or two aggressive hybrid schemes. Aggressive hybrid schemes invest in a mix of equity (at least 65 per cent) and debt, and they are less volatile than pure equity schemes because the debt portion offers a cushion in times of volatility. Others can pick up one or two diversified equity schemes to fund their long-term needs.
Stocks: Investing directly in stocks can be extremely rewarding, but it is also equally risky. You should attempt it only if you have a sound knowledge about the working of the stock market. You should also have enough time in hand to pick stocks and monitor them.
Tax saving options
Public Provident Fund: Ideal long-term tax saving option for conservative investors. The contributions to it qualify for tax deductions and interest earned is also tax free. However, it has tenure of 15 years and partial withdrawal is allowed from seventh year onwards only.
ELSS or Tax planning mutual funds: The best tax saving option for aggressive investors. They have a mandatory lock-in period of three years but invest only if you can wait for more if the market gets into a bad phase.
National Pension System (NPS): NPS is a contributory pension scheme backed by the Government of India. The investments are eligible for deduction under Section 80C and also an additional deduction of up to Rs 50,000 over and above the Rs 1.5 lakh limit.
However, the invested money is locked in till the investor reaches the age of 60. Thereafter, up to 60 per cent of the corpus can be withdrawn as a tax-free lump sum and at least 40 per cent has to be utilised to buy an annuity plan. Although it allows investors to make partial withdrawals before they reach the age of 60, a lot of conditions are attached to it.